Matt:
What kind of business are you in? e.g. do your employees bill time to internal projects or to clients?
What specific questions are you trying to answer?

I always start with direct costs of hire - pay, benefits, that can be readily identified as being driven by the employee activities; this varies from ops people to sales/field staff.
Allocation of office overhead can become an interesting exercise- it's not under the control of the employee, so sometimes this is an arithmetic exercise.
Also, what happens to the overhead if headcount changes rapidly?

Len points out that applying an overhead can be misleading. As always overheads come in two buckets, one fixed, which can not be associated with an individual employee and the second variable, those costs required to support the new hire.

Generally fixed or sunk costs are not included when evaluating the cost / benefit of hiring a new employee. There is no easy answer to your question as each company is different requiring unique judgements when constructing the cost model.

Hi Dick - I agree that OH cost can be split between fixed and variable, but that does not mean those fixed costs cannot be allocated over the headcount or square foot base.
In fact, this is required when you work on Govt contracts. All allowable indirect costs must to allocated to a final cost objective, such as customer contracts to recovered via billing. As long as you understand the relationships between the numbers, such as that the fixed cost portion of an OH rate that is a % of direct labor, will decrease as the direct labor increases and the variable cost portion remains relatively proportional to the volume of direct labor.

Roger - I can certainly contribute to your suggestion. Your rates are very different than any I have seen (in 30 years of GovCon) at large & small companies. I have never seen Fringe or G&A that is higher than OH, can you share what creates such an unusual set of indirect rates?

I have more experience with large Govt contractors so I have never seen an OH rate as low as your example, rarely seen less than OH 100%, but I have also most often seen Fringe at all size companies in the 30's, have never seen 40's yet. G&A a bit hi too.

I am interested to understand the components of the pools/bases for these rates?

With regard to manufacturing, large companies often have more than one OH rate, and one example is to have a high manufacturing OH rate and a lower engineering OH rate.

Theresa - Thanks for your feedback. The rates I cited apply to several small businesses in a niche market, IT services for the Intelligence sector, where there is such competition for fully cleared (TS/SCI with poly) engineers that benefits are exceptionally high (e.g., fully paid family health insurance). OH is low because most direct personnel work on government site.

Indirect costs are typically divided into Fringe, Overhead, G&A & Un- allowable.
Fringe benefit costs are typically allocated as a percentage of total labor.
Overhead is typically allocated as a percentage of direct labor supported.
G&A is typically allocated as a percentage of total direct & indirect cost.

We must collect costs in Pools such as Fringe Pool, OH Pool, G&A Pool, etc.
and then these pool costs are divided by their appropriate base to compute
a rate, such as a fringe rate, overhead rate, and G&A (Gen & Admin) rate.

Sometimes there may be multiple Fringe or Overhead pools where a group of
overhead costs clearly only benefit a portion of the direct labor, as is
the case when you have multiple locations, you might want to have two OH
rates that are only applicable to one or the direct labor bases not both.
Another common split may be engineering vs. manufacturing overhead where
the costs of supporting each type of work differs significantly and so
should be allocated differently.

These indirect rates are computed at the beginning of the year using budgeted costs to compute budgeted rates, and these budgeted rates are used for creating cost proposals and for billing customers during the year until year end actual costs are known and are divided by direct cost bases to determine year end actual indirect rates. Those actual indirect cost rates are audited and then applied as burden to direct cost bases and are adjustments made to annual billings and must be rebilled to either collect the under-billing or repay the over-billing that was done using the budgeted indirect rates.

Then for each line of the TB, put that amount in the correct column until all are
in one and only one column, then add totals at bottom to confirm you counted all.

And there you have the amounts that make up your pools an bases to compute indirect cost rates to apply as burden to direct costs, so that all costs ae fully allocated.

The only cost excluded form these allocations are unallowable costs that cannot be billed to the Government basd on FAR (Federal Acquisition Regulations) Part 31.

Anonymous

(CFO)
| Dec 12, 2014

I work in government and have seen a lot of what I consider abuse of overhead costs by governmental agencies. G&A burdens are often created and allocated in an effort to "hide" these costs from scrutiny. From the public and from the unions.

I once was tasked with creating internal project cost estimates for comparison with contracted out costs. Internal was always a lot more due to the G&A burden. The in-house union people - and I was a member myself because of closed shop rules - came close to tarring and feathering me because of these comparisons. They blamed me even though I told them to take it up with the executive administrative staff that was the G&A burden factor that we applied to everything else.

Anonymous, when you were calculating the internal costs, did you include the cost of your doing the assessment?

Anonymous

(CFO)
| Dec 17, 2014

@Miller:

Yes and no. It wasn't that simple.

This was one of the largest special districts in the U.S. The G&A burden was all compensation costs associated with the executive administration and finance departments - including my salary and benefits - as an overhead burden proportionally to all other labor costs in the agency. It encompassed a few million dollars.

They simply didn't want any line item in their financial statements that might tip off the public or the various unions involved as to how bloated and perhaps even overcompensated, the top administrative positions were. So, the were combining them with the finance department (almost 40 positions!) compensation and allocating that as an overhead burden to every other functional department within the GL.

As an aside, one of my other tasks during my time there was trying to justify the overhead burden for a federal court judge who did not understand the concept of an overhead burden. The agency was in court pursuing a lawsuit against FEMA for cost reimbursements for emergency services the agency had provided during the Loma Prieta earthquake. FEMA had denied all of the overhead burden.

Needless to say, judges aren't accountants and the agency did not prevail on this point. As far as he was concerned, direct costs were all that mattered.

I see a lot of very specific information being bandied about here as allowable overhead on a government contract. As a government employee who has been involved in government procurements in several public agencies, I would caution that the correct answer is "it depends".

It depends on the source of funding for the project. This is especially true with Federal funding.

The right place to look is in the RFP or RFQ. All of the requirements that need to be met will be either spelled out or, referenced there. Governmental agency procurement departments spend copious amounts of time and money complying with the bid requirements lest they lose their funding.

Ricardo:
The best source I have found to understand how indirect rates are calculated is downloading the Incurred Cost Electronically (ICE) from DCAA (dcaa.mil). Schedules A-D show how the G&A costs (including B&P and IR&D) are used in calculating G&A, OH, and Fringe rates.
Jim

I have no 'template' but have run FP@A and costing initiatives for several very large companies, including MSFT, AT&T Wireless, as well as several startups, etc. I think it very important to estimate costs per employee as detailed as possible as some costs, although small (supplies, phone, coffee/beverages) as they can surely add up as FTEs grow. I am not in favor of allocating space as an employee cost individually, but rather forecast space costs per a certain group of employees, i.e. every 20 new FTE's will require 'X' amount of new space.

I can probably definitely help you with this although since G&A does not travel alone, I am curious about the other rates, and what is prompting you to ask about this. There are multiple ways to compute G&A and they depend on whether. Offhand you would need to select between a total cost or value-added G&A base or using a 3-factor formula. Those are the three most common. tell me more on what is prompting this question and I will be glad to help however I can.

Hi Ricardo - Just went to close this window and had a thought I should mention in case it is a concern with regard to confidentiality, because we can discuss this here with no secret information required, just wanted to make sure you knew that is not what I'm
asking for to help you. Just curious if you are new to GovCon or if company is, are you trying to do a budget, proposal, cost claim, Govt billing, DCAA audit or what?

Here are some ideas - let me know if this is what you are thinking. These are more driven to change management behaviors instead of external reporting.

IT dept support - by number of computers in the dept.Human resources cost - based on headcount (not on salaries)
Overhead - in our case we aim to cap overhead at 5% of expenses (not revenues) so emphasis may be to be more efficient (i.e., reduce expenses not revenue.
Depreciation, utilities - based on square footage. Motivates managers to be more efficient with their space.
Employee benefits are easy when it relates to FICA and pension benefits but may not be so clear cut with health care benefits. We have three health care rates (i.e., single, employee +1 and family). We are now identifying types of coverage by employee and thus by department. Before this year allocation was a % of salary. Found out that in one dept employees lobbied to increase hours to 30 (limit to get health care benefits). The marginal cost was huge when going from 28 hours to 30 hours with little to no corporate benefit. Managers were made aware of this practice so they could control it.
Found some surprises when performing a time and motion study in our Admissions office and in our billing dept. We had been allocating 80% of admissions to LOB A, and 20% to LOB B based on volume. But based on admissions it changed to 6% and 94%. It swung LOB B from a gain to a loss, we changed staffing in admissions office to swing LOB B back to gain.

Hi Augusto - Would I be safe to assume you do not work for US Government contractor?
I would agree with the first part of your suggestion with regard to the basis for allocation of IT, HR & Facilities (assume this includes rent, maintenance, etc.)
as long as you have a system that will compute on the manual bases, as we do, I
would agree with those allocation bases. When you get to Overhead, what are you
talking about hear "capping at 5% of expenses not revenue" what does this mean?
What expenses and what does revenue have to do with computing overhead rates??
On the fringe, just a heads up that you can make yourself crazy with that one by trying to go down to dept. or employee and in the effort to do so (track by ee),
odds it will get whacked out worse than before or as soon as you grow is what I
have seen. Too many little pieces of cost trying to follow the labor of each ee
and in the end I think you will not find a significant difference to = effort.
I have found even most huge companies stick with a single fringe pool as a %
because there ends up being so many variables in both directions they offset
and net back to 1% or less difference. I have found this ot be the case even
with companies who think they have very distinctly different fringes like for
for employees working overseas some things are more expensive, but those costs
tend to be offset by benefits those employees cannot partake in such as in the holidays, jury duty pay, etc. In every case I have seen so far you can spend a
whole lot of time picking the costs apart but when you get them all lined up
and put them next to each other, for starters the curve to get 100% is crazy,
and I am usually the proponent of more detail is better, but this on this one
I have seen enough times not to be worth it. By all means you want to do the
initial analysis to be sure but I think you will reach same conclusion on this.
I look forward to hearing about that overhead calc.

In view of the above discussion it might be very helpful to many members if those of us in the government contracting arena would share our knowledge of the normal range of indirect cost factors (Fringe, Overhead and G&A) in particular sectors.
For example, a small IT services contractor might have a Fringe rate of 40-45%, Overhead of 7-10%, and G&A of 15-19%.
I'd be curious to know what a small manufacturer in the government contracting world might have as an Overhead rate. Anybody?

A good source of information for government contractors on indirect rates as well as other government contracting accounting and financial issues is the DCAA publication “Information for Contractors”, which can be found at http://www.dcaa.mil/dcaap7641.90.pdf. Chapter 6 discusses bases and pools and shows examples. Even if your government contracts aren't subject to DCAA rules and audits, this publication is still a good reference.

This disparate treatment of R&D rates among government agencies illustrates another factor that experienced government contractors know – the rules vary from agency to agency and from contract to contract, and you need to thoroughly understand the requirements in each of your contracts. This can take a lot of time to learn, especially since many of the requirements will be incorporated by reference. But a lack of comprehensive understanding of the requirements can cost much more; at best, you could be leaving a lot of money on the table, and at worst, you could be subject to criminal penalties.

Hi Mike - I agree, I call that DCAA 101 and it is the first document I send to anyone new to Govt contracting. I believe you might want to clarify that you are referring to IR&D since contractors may have R&D contracts which of course would be direct vs. G&A.

While the DCAA is a great place to start, I work at a small IT consulting firm and we have not yet had a government contract requiring DCAA compliance. We do see them come out and expect to go down that avenue in the future it is not always necessary when dealing with the federal government again it all comes down to knowing your contracts. We typically run our margins per contractor between 20-35% as a subcontractor and between 40-50% for prime contracts. Our G&A is running in the ballpark of 18-20%.

If you create a fringe rate with just payroll taxes it comes to at least 8% (Employer share of FICA, FUI and SUI) If you add in holiday pay say 10 days, and vacation pay another 10 days over a normal work year of 260 days (52 weeks at 5 days a week) you have another 8.3%. Remember to take what you put in the Pool out of the base (10+10=20, and 260-10-10=240),

So you are 16% to start before medical and dental or any other employee benefit you may have. The big driver maybe how you recover the "down time". The hours you pay the employees when they are not billable (sick, meetings, training). If that is in your fring rate your base goes down and your pool is increased, rate moves up quickly,

Medicare and Medicaid represent more than 50% of our revenue so I guess we are a government contractor but not from the perspective you are probably thinking.

I agree with you about the health care costs allocation for most traditional companies with 40 hour per week employee. Many of the issues we identified were because of part time workers (a significant portion of health care providers). I discussed this with an HR professional at a 10,000+ employer and your approach is consistent with their findings. However, we identified the risk of non-covered employees selecting our health care plan as the major business cycle risk. Especially since our cost per employee with family coverage is over $10,000. We have over 500 employees, 300 FTEs and only about 180 have health coverage. So if 30 more switch from whatever plan they have to ours with family coverage, the cost could wipe out more than 50% of our earnings.

Ah, government. We pay pretty much 100%. It's way more than $10,000 per employee. In my own case, it's over $20,000 annually! It's the only thing keeping me from retiring. This growing cost is also slowly sending us into insolvency. But my cries for consideration go unheeded. In fact, the CEO muzzles me and hides this from the board.

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